HEALTH Minister Dr James Reilly is giving the go-ahead for a radical new way of funding hospitals from next year, after an international expert gave the all-clear to the reform.

The shake-up is intended to cut waiting lists, make hospitals more efficient and get them competing with each other for funding.

Instead of giving a hospital a block grant, the funding will be based on the number of patients the hospital treats and the services it provides.

The move is viewed as the way to dismantle the overly centralised control of the Health Service Executive (HSE).

The budgeting model is similar to the system in Germany, which has one of the best health services in the world.

A National Pricing Office will be set up at the start of the year to set the price to be paid to a hospital for carrying out a particular procedure.

The new funding model, known as Money Follows The Patient (MFTP) will be rolled out on a "phased implementation" basis to 38 hospitals next year.

An international expert gave the all-clear to go ahead when he found the amount of preparation was "higher than the level of readiness that has been found necessary to implement MFTP in other countries".

The move to MFTP is viewed as a key part of breaking up the HSE and moving towards universal health insurance.

A pilot project in the MFTP model for hip and knee replacements in Cappagh Hospital resulted in a 45pc increase in day-of-surgery admission rates and a two-day reduction in patients' average length of stay – without any drop in safety standards.

At the moment, there is no incentive to hospitals to treat more patients.

Patients can be regarded as a cost to the system, whereas under the new model, patients become sources of income.

Hospitals will be encouraged to specialise, with small hospitals looking in particular on day cases.

All hospitals will have the new system in some form by the end of 2014 and fully implemented by the end of 2015.

The major hospitals are understood to be the best prepared for the transition for MFTP and will be the first to move.

The first phase will include all in-patient and day case activity in the 38 casemix hospitals.

Hospitals will continue to be block funded for costs related to other areas than in-patient and day cases in the first instance.

The policy change has been on the cards for some time but the Government is moving ahead after a successful test case and an external assessment.

Professor Ric Marshall, an international health service management expert from Australia, found the preparation in some cases was "higher than the level of readiness that has been found necessary to implement MFTP in other countries".

"It is therefore a primary recommendation that implementation should proceed immediately on a phased basis, supported by sound communication with hospitals and other stakeholders," his report says.

Prof Marshall did identify some problems to be ironed out, but nothing that would hold back the move.

"While several deficits and deficiencies, both actual and perceived were identified by stakeholders, none should be seen as a reason to delay a phased introduction of MFTP funding mechanisms in the Irish hospital system," he says.

Prof Marshall has worked on health service management reform projects in 17 countries, including Germany and Britain.

The internationally recognised expert in Case-mix and Activity Based Funding carried out a "state of readiness assessment".

His report has not yet been published or released to hospital, but finds:

"Much of the necessary preparation is already in place"; "There is a high level of awareness of the mechanisms required for MFTP"; "There is a need for improved data reporting mechanisms".

Government officials believe prices in the health system are high but the level of activity is regarded as low and the MFP model will tackle this problem.

The model will change the way the health system operates as it will separate the providers of treatment from those paying the bill, known as the purchaser/provider split.

"At the moment, the HSE is purchasing services from itself. There's a conflict of interest. You're answerable to yourself. There's no accountability in the system. No one is accountable to anyone else. This is how the HSE will be dismantled," a source involved in drawing up the policy said.

"If you can't tell where money is spent, how can you tell whether you are getting value? It's not about closing small hospitals, it's actually about getting them doing more by shifting procedures from big to small hospitals."

The MFTP model is supposed to reduce waiting lists and improve patients' experience as hospitals have to become more organised in the way.

"You turn it around. You say to the hospitals that we'll pay for each patient you treat. The more patients you treat, the more money you get – and vice versa," a source said.